SNC-Lavalin Rebounding as CEO Card Weighs Asset Sales

SNC-Lavalin Group Inc. (SNC) has recouped
the last of C$2 billion in market value lost in a corruption
scandal as Chief Executive Officer Robert Card reshapes Canada’s
largest engineering company.

The shares are now trading about 2.6 percent above their
closing price on Feb. 27, the day before SNC announced a probe
of inaccurate documentation in its construction unit. The stock
was still 1.1 percent below that price yesterday, reflecting a
wider investigation that led to fraud charges against former CEO
Pierre Duhaime and class-action lawsuits from investors.

Ensuring the company kept its “social license to operate”
was among the top priorities for Card, who became chief on Oct.
1. He has appointed new senior managers and is considering the
sale of infrastructure assets from a toll road to power lines
after grouping them in a new unit.

“Bob Card is doing the right things,” Trevor Johnson, an
analyst at National Bank Financial in Toronto, said in a
telephone interview. “He put his mark on the company by
bringing his own team and that’s resonated well with investors.
It makes it easier to forget about what happened when you have
people who weren’t there in the first place.”

SNC has climbed 42 percent from its Aug. 31 low of C$35 in
the wake of the investigation’s disclosure.

“People are jumping on the bandwagon,” said Maxim Sytchev, an AltaCorp Capital analyst who has a target price of
C$57 for SNC shares.

The stock gained 3.8 percent to C$49.65 at 4 p.m. in
Toronto, the first close above the pre-scandal price and a 65
percent premium to the benchmark S&P Toronto Stock Exchange
Composite Index on a price-earnings basis.

‘Entirely Justified’

“SNC-Lavalin’s recent share price gains are entirely
justified, and more importantly, we continue to see further
upside from current levels,” said Michael Tupholme, an analyst
at TD Securities in Toronto who has a buy rating on the stock.

Tupholme raised his 12-month target price to C$57 from C$52
yesterday, citing rising valuations for the company’s
infrastructure holdings and “our increased confidence that SNC-Lavalin is moving past many of the issues” that have weighed on
the stock since February 2012.

Before Card revamped the company’s structure, SNC’s
infrastructure and environment businesses made up its largest
unit, generating 27 percent of C$7.21 billion in sales in 2011.
Infrastructure concession investments accounted for an
additional 7 percent of revenue.

Asset Sales

In Card’s first three months on the job, he created a new
infrastructure, concessions and investments unit, and put Gilles Laramee, the company’s acting chief financial officer, in
charge, with a mission of providing “a top level focus on
strategic oversight.”

The CEO said on a Nov. 2 conference call that SNC-Lavalin
had begun assessing which infrastructure concession investments,
or ICIs, it wanted to keep. Owning such assets, including a
minority stake in Ontario’s Highway 407, has allowed Montreal-based SNC-Lavalin to win construction contracts in recent years.

The company hasn’t announced any decisions from the review,
and Leslie Quinton, a spokeswoman, declined to comment further
yesterday.

SNC-Lavalin said in December its infrastructure assets had
an estimated market value of C$3.4 billion as of Sept. 30,
including C$1.5 billion for the Highway 407 stake and C$1.1
billion for the AltaLink power distribution company.

Activist Investor

Highway 407 and AltaLink might generate C$3 billion in cash
if they were sold, RBC Capital Markets said Feb. 1.

“People are getting excited about them potentially
monetizing some of their infrastructure investments,” National
Bank Financial’s Johnson said.

Pressure on SNC to sell some of the holdings may increase
with the acquisition of a stake by a Toronto-based hedge fund,
West Face Capital Inc.

Having an activist investor such as West Face on board
“can’t hurt,” Luc Fournier, a fund manager at Quebec City-based Industrial Alliance Insurance Financial Services Inc. said
by phone. “They’ll be under pressure to create some value.”

Quinton confirmed via e-mail that the company learned late
last year about West Face’s stake. SNC doesn’t know how large
the holding is because only those that exceed 10 percent must be
reported, she said, adding that company executives have met with
West Face officials.

Greg Boland, West Face’s CEO and founder, didn’t respond to
voice mail messages left yesterday and last week for this story.
The Globe and Mail newspaper reported West Face’s investment in
SNC last week.

Investor Payout

Should an asset sale occur, “most investors would be
looking for a special dividend,” said Johnson at National Bank
Financial. He raised his rating on SNC to outperform from sector
perform on Nov. 4, saying a potential sale of all or part of the
infrastructure holdings could “unlock value.”

In addition to strategic options, a second part of Card’s
strategy has been relocating executives outside Canada to help
SNC win new business globally.

He took a step toward that last month when he announced the
hiring of former Amec Plc (AMEC) Chief Operating Officer Neil Bruce as
president of resources and environment -- a new unit that is the
company’s largest. It includes hydrocarbons and chemicals,
mining and metallurgy, environment and water. Bruce is based in
London.

Fraud Charge

Those steps have taken place against the backdrop of the
criminal investigation, including the arrest of Duhaime in late
November.

The ex-CEO was formally charged in a Montreal court
yesterday with fraud, conspiracy to commit fraud and issuing
false documents, Michel Massicotte, his lawyer, said in a
telephone interview. Duhaime pleaded not guilty, Massicotte
said.

A warrant obtained by the Quebec police anti-corruption
unit accused Duhaime and Riadh Ben Aissa, who oversaw SNC’s
business in Libya, of defrauding the McGill University Health
Centre of more than C$5,000. SNC won a C$1.6 billion contract in
2010 to build and maintain the facility.

Ben Aissa, who left the company last February, was
subsequently arrested by Swiss authorities investigating
allegations of corruption, fraud and money laundering related to
business in North Africa, the country’s Attorney General’s
office said.

Class Action

He has been held in Switzerland since without being
charged, Ben Aissa’s brother, Rafik, said in a Jan. 26 statement
on his complaint against the Swiss prosecutor in the European
Court of Human Rights in Strasbourg, France.

Elie Chahwan, a lawyer for the Ben Aissa family in
Montreal, said in a telephone interview yesterday that he
couldn’t immediately comment on the Quebec case against Riadh
Ben Aissa.

Investors who bought company securities from November 2009
to February 2012 have accused SNC and executives including
Duhaime of “misrepresentations” regarding internal controls,
and 2010 net income, in class-action lawsuits certified in
Ontario and Quebec.

SNC plans “a vigorous defense,” Quinton said in an e-mailed statement. “We have always published information
appropriately and accurately, following regulatory requirements
and best practices regarding timely corporate disclosure.”

Potential penalties stemming from the various lawsuits
probably won’t exceed C$360 million in the worst-case scenario,
according to Yuri Lynk, an analyst at Canaccord Genuity in
Montreal. Lynk based his analysis on a study of past bribery
cases in Canada and the U.S.

SNC Backlog

SNC had C$1.1 billion of cash as of Sept. 30, according to
a Nov. 2 filing.

Just as encouraging for investors, new business is
continuing to roll in. SNC-Lavalin had a backlog of C$9.9
billion as of Sept. 30, compared with C$10.1 billion at the end
of last year.

Excluding some costs and gains, SNC is expected to earn
C$2.17 a share in 2013, up from an estimated C$1.59 last year,
according to the average of estimates in a Bloomberg survey of
analysts.

SNC said Jan. 31 that a group of companies it leads signed
an agreement with British Columbia to design, build and finance
the Evergreen Line rapid transit project in Vancouver --a
project estimated to cost C$889 million.

‘Different Future’

“Their performance in the fall and winter time was quite
robust,” said Johnson at National Bank Financial. “People want
to continue to see big contract wins, just as they’ll want to
see what they do with the cash if they monetize any of their
assets.”

One investor continuing to back the company is Caisse de
Depot et Placement du Quebec, Canada’s second-biggest pension
fund manager. The Caisse owned 8.9 million SNC-Lavalin shares as
of the end of 2011, according to its most recent annual report.
That would represent about 5.9 percent of outstanding shares,
the second-most among the company’s institutional investors.

SNC “is a company filled with potential,” Caisse CEO
Michael Sabia said Jan. 29 at a press briefing in Montreal.
“This is a time when a long-term investor like La Caisse needs
to help that company build a bridge to a different future.”

Sabia said he’s encouraged by the company’s Dec. 13
announcement that some directors won’t be standing for re-election this year. Those directors will be identified in the
management information circular filed before the 2013 annual
meeting, the company said.

“That board is moving, there’s a new CEO in place, the CEO
is beginning to do things,” Sabia said. “I know that now SNC-Lavalin is tarnished because of what’s happened, but you can’t
lose the forest for the trees.”